How should I judge an ARM?

On the worst case, not the teaser rate. If you can afford the payment at the lifetime cap, the initial saving is a reasonable bet. If not, you are borrowing against a risk you cannot absorb.

Finance & LoansmortgageUnited States only

ARM vs Fixed Rate Calculator

ARM against fixed rate, judged on the capped worst case rather than the teaser rate. The question is not whether the initial saving is real but whether you can afford the payment if rates hit the lifetime cap.

Also called: adjustable rate mortgage calculator, arm vs fixed comparison.

Saving during the fixed period

$14,825.75

$14,825.75 saved over the 5 year fixed period, at $247.10 a month. If rates rise to the cap the payment goes to $3,391.34, which is $926.67 more than the fixed payment. Over 7 years the ARM costs more in the capped worst case, so it is a bet on rates not rising that far.

Initial monthly saving

$247.10

Fixed rate payment

$2,464.67

ARM initial payment

$2,217.58

Worst case ARM payment

$3,391.34

Increase over the fixed payment

$926.67

Worst case rate

10.75%

Verdict

costs more in the capped worst case, so it is a bet on rates not rising that far.

How this is calculated

An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.

Method and background

This is what the calculation gives for the numbers you entered. It is an estimate, not advice, and it knows nothing about your situation beyond those numbers. Rules for United States change on a published schedule; the effective date is shown on every rule-based tool.

How this is calculated

An ARM offers a lower rate for an initial period, then adjusts subject to periodic and lifetime caps. The initial saving is certain and the later cost is not, so the sound way to evaluate one is to check the worst case: can you afford the payment at the lifetime cap? If yes, the ARM is a reasonable bet, particularly if you expect to sell before the adjustment. If no, the initial saving is borrowed against a risk you cannot absorb.

the caps bound the risk, and the worst case is what an ARM should be judged on

r: Rates

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

a 5/1 ARM a point below fixed

Loan amount: $380,000.00
Fixed rate: 6.75%
ARM initial rate: 5.75%
ARM fixed period: 5
Periodic adjustment cap: 2%
Lifetime cap above initial: 5%
Term: 30
Years you expect to hold: 7

Saving during the fixed period$14,825.75

5.75 plus the 5 point lifetime cap

Open this example

the same rate means no saving

Loan amount: $380,000.00
Fixed rate: 6.75%
ARM initial rate: 6.75%
ARM fixed period: 5
Periodic adjustment cap: 2%
Lifetime cap above initial: 5%
Term: 30
Years you expect to hold: 7

Saving during the fixed period$0.00

boundary

Open this example

Method and limits

What it assumes

Rates rising to the cap at the first opportunity, which is the worst case rather than a forecast.

What it deliberately does not model

The index the ARM tracks determines the actual adjustment, which no calculation can predict.
Some ARMs have a different first adjustment cap from the periodic cap.
This is a comparison, not advice on which product to choose.

Formula version 1.0.0 · definition 1.0.0 · United States · Report a problem with this calculator

Frequently asked questions

How should I judge an ARM?: On the worst case, not the teaser rate. If you can afford the payment at the lifetime cap, the initial saving is a reasonable bet. If not, you are borrowing against a risk you cannot absorb.